Good day and welcome to the Progress Software Corporation Q2 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker Mr. Mike Micciche, Vice President of Investor Relations. Please go ahead.

Great, Thank you, Sherry. Good afternoon, everyone, and thanks for joining us for Progress Software's second fiscal quarter 2023 financial results conference call. With us today is Yogesh Gupta, our President and Chief Executive Officer; and Anthony Folger, our Chief Financial Officer. Before we get started, let's go over our Safe Harbor statement. During this call, we will discuss our outlook for future financial and reporting performance, corporate strategies, product plans, cost initiatives, our integration of MarkLogic, and other information that might be considered forward-looking. Such forward-looking information represents Progress Software's outlook and guidance only as of today and is subject to risks and uncertainties. For a description of the risk factors that may affect our results, please refer to the Risk Factors section in our most recent Form 10-K. Progress Software assumes no obligation to update the forward-looking statements included in this call. Additionally, on this call, all the financial figures we discuss are non-GAAP measures unless otherwise indicated. You can find a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP numbers in our financial results press release, which was issued after the market close today. This document contains additional information related to our financial results for the second quarter of 2023 and I recommend you reference it for specific details. We have also prepared a presentation that contains supplemental data for our second quarter 2023 results, providing highlights and financial metrics. Both the earnings release and the supplemental presentation are available in the Investor Relations section of our website at investors.progress.com. Today's conference will be recorded in its entirety and will be available via replay on the Investor Relations section of our website. And with that out of the way, I'll turn it over to Yogesh.

Thank you, Mike, and good afternoon, everyone. Welcome to our second quarter 2023 earnings conference call. As you saw in our press release, Progress had another great quarter with earnings, revenues and operating margins, all ahead of estimates. As a result, we have raised our full year 2023 outlook, which Anthony will detail for you in a few minutes. In the quarter, revenues were up 19% year-over-year to $179 million. Thanks to continued strong demand for our products and a fantastic performance again from our teams in the field. Our customers and partners remain committed to using Progress products to run their businesses, especially in these more challenging economic times. And we remain committed to providing them with great value and ensuring their success. Earnings per share came in at $1.06, well ahead of estimates driven by strong top line revenue and helps by excellent execution on the MarkLogic integration as well as prudent expense management from all of our teams. Operating margins exceeded targets, ending the quarter at 38% versus consensus of around 35%. ARR grew in the second quarter to $569 million, an increase of 19% year-over-year and was driven by the acquisition of MarkLogic and a net retention rate that was again above 101%. These outstanding results were achieved across virtually all product lines and geographies with a strong contribution from MarkLogic, which I'll talk more about in a minute. Our product portfolio saw broad strength this quarter led by OpenEdge, Loadmaster, Chef, Sitefinity Cloud, and MarkLogic offerings. Strength in OpenEdge was driven by customer win-backs as well as their need to modernize their applications, once again demonstrating the value that this platform provides for the mission-critical applications of the future. Loadmaster, which we acquired through Kemp continues to see new customer wins through the Dell Channel…

Thanks, Yogesh. Good afternoon, everyone, and thanks for joining our call. As Yogesh mentioned, we're very pleased with our Q2 results, which again exceeded the high end of our guidance range on revenue and earnings per share. We're also very pleased to see some of this upside coming from MarkLogic, which is performing a bit better than our expectations thus far. Turning to the numbers. We'll start on the top line with ARR. We closed the second quarter with ARR of $569 million, which represents approximately 19% growth on a year-over-year basis and 3% pro forma growth on a year-over-year basis. To be clear, the pro forma results include MarkLogic in both periods. As Yogesh mentioned, the growth in ARR was again driven by multiple products across our portfolio including OpenEdge, MarkLogic, Sitefinity and DataDirect. A trend that continues to fuel our ARR growth is strong net retention with Q2 rates at just over 101%. In addition to our strong ARR growth, revenue for the quarter of $179 million was well above the high end of the guidance range we provided back in March and represents approximately 19% growth on a year-over-year basis. The better than expected revenue performance in the quarter was driven by stronger than expected demand from multiple products including OpenEdge, Loadmaster, Chef, MarkLogic, Sitefinity. For those of you who listened to our Q1 earnings call, you'll recall that our Q1 performance was aided slightly by timing. In that, some revenue we expected to recognize in the second quarter actually came in early and was recognized in the first quarter. I mentioned this only to highlight our exceptional top line performance in Q2, which punctuated a very strong first half of 2023. Turning now to expenses. Our total costs and operating expenses for the quarter were $112…

Thank you. [Operator Instructions] Our first question will come from the line of Ittai Kidron with Oppenheimer. Your line is open.

Thanks, guys, and great execution. Maybe a couple of questions for you, Yogesh. First on the MOVEit issue in this past quarter. Can you, first of all, quantify how big of a product line that is for you from a revenue standpoint? And what has been the feedback from customers? I know it's not easy to move off something like this quickly. But what is the risk here down the road that customers are trying to find alternatives to this situation?

Hey, thank you, Ittai for the nice feedback on the quarter. We had actually in our 8-K that we filed mentioned that the MOVEit file transfer, MOVEit transfer product and MOVEit cloud which are the two products that were impacted were less than 4% of our overall annual revenue. So it's a rather limited impact so to speak. As far as customers are concerned, Ittai, we continue to engage with them. Our focus at this point is making sure that they get their environment secure and continue to get work done. We feel really good about the effort our team is putting in to help our customers. And at this point, it's really too early to speculate about potentially what kind of an impact we might have in terms of customers saying that they want to use something else. So right now, Ittai, we're just focused on making sure that our customers are back to running, back to feeling that their environment is secured, applying the patches that we've provided them, et cetera.

Very good. And maybe a follow-up for you on, I want to make sure I understand the commentary. Last quarter, clearly, there was some pull-forward element and some components. Help me understand to what degree do you have visibility whether the products or outperformance this quarter is also a pull forward from the third quarter perhaps or just pure expansion activity given specific needs of customers? How do you get your hands around this?

Yeah. So go ahead, Ittai. Go ahead, Anthony.

Yeah. I was just going to jump in there Ittai and say, yeah, in Q1 of this year, we did have a couple of deals that came in earlier than we anticipated. And I think they came in earlier and maybe they were a little bit bigger. In Q2, there really was none of that activity. So I don't think anything in this quarter, at least nothing material is something that should have been recognized in Q3. And that's why I made the comment in my remarks because I think we felt really good about the performance in the quarter. And I think in light of the fact that some of the revenue got booked in Q1. I think it just -- it makes it even stronger case for how good the performance was in Q2 on the top line. So it's continuing to acquire new customers, continuing to renew, continuing to expand with our existing customers. I think in a lot of areas we're performing well.

Excellent. Good stuff. Thank you very much. Keep it up.

Thank you. One moment for our next question. That will come from the line of Ray McDonough with Guggenheim Securities. Your line is open.

Great. Thanks for taking the questions. Yogesh, maybe for you. You mentioned customer success is obviously core to your strategy and you opened up with statements regarding customers remaining committed to using Progress products. But I was wondering how conversations went outside of the MOVEit customer base regarding the vulnerability. Have customers outside of that installed base indicated any concern around using any other Progress products? Or just in general how have those conversations went?

So at this point, Ray, the -- because the issue is limited to MOVEit, we really have not had other customers come to us and raise concerns. One of the state of things in the software industry is that the vulnerabilities that show up all the time. I think somebody was telling me that more than 10,000 vulnerabilities have been highlighted by software vendors in this last six months alone. So it is in some way, unfortunately, it is the state of the world that basically you have cybercriminals going out there and doing what they do. So, no, we have not had customers of other products raise any issues at this point.

That makes sense. And then maybe a follow-up for you, Anthony. You guys beat non-GAAP operating margin guidance by a significant margin here and you're maintaining your full year guidance as it relates to margins. Do you expect to ramp spending in terms of OpEx in the back half of the year? And should we be thinking about incremental spending on cybersecurity for instance to move the needle in terms of OpEx spending? Any color there would be helpful.

Yeah. Sure, Ray. I don't think that we had I would say pretty significant investments in cyber coming into the year and we have for a couple of years ongoing now. And so I think with the top line beat if there is an opportunity to invest more where necessary, obviously, we would. But there are other costs in the business. Wage inflation continues to run and we talked about that from time-to-time and inflation generally seems to be pretty persistent. And so I think we are trying to give ourselves a little bit of latitude around the margin, on the operating margin as some of those costs may continue to escalate as the year goes on. I think that's really it.

Great. Thanks for taking the questions.

Thank you. One moment for our next question and that will come from the line of Pinjalim Bora with JPMorgan. Your line is open.

Great. Thank you so much and congrats on a great quarter. Yogesh on the MOVEit point or the issue, I guess, I'm wondering if you can actually take any proactive steps or are you taking any kind of proactive steps to look at the rest of the product portfolio, mainly the new acquisitions to Ipswitch kind of the customers from those using those products?

So, Pinjalim, that is a really, really good question, right? So we, of course, have had a very robust security program at Progress. We take product security extremely seriously. I'm sure you can imagine being a provider of software to the wide range of customers that we are. We have -- we are basically investigating. So right now, by the way, first, in the last four weeks, it has been all hands on deck for our customers. So I just I don't want to imply that we are going around doing other things. But we are looking to sort of see are there other areas of our products where we need to do better in the area of security. We also I think maybe need to look at whether we are going to improve our M&A process around security of the products we acquire. And I think that was part of your comment that you made this came to us through Ipswitch in 2019. So I think those things are all really important, but I don't want to imply that we have not taken security seriously all along. We actually do. We have -- we use industry-leading code scanning software to scan our code for vulnerabilities. We have hackers come in and test our software for -- to find vulnerabilities if they can. I mean it's a multi-faceted approach and we have a very strong response team in case something does go wrong. So I don't want you to think, Pinjalim, that now we will think about other product security. We have actually taken product security very, very seriously all along, but this also creates an opportunity for us to see if there other things where we ought to improve.

Got it. And one question on just the M&A front. I'm wondering if the wave of investments in generative AI companies could be good for you maybe as VCs kind of reprioritize their portfolio. Could that actually drag down the exit multiples for some traditional assets?

I think that this is always, Pinjalim, one of the fun things about being who we are, right? The VC world usually moves to the next shiny object. And so the workhorse businesses that got created over the last decade or last 15 years that become really, really strong. They then become not that interesting to VCs, right? And when that happens, that basically means that their valuations do change. And so, you're absolutely correct. I think that it will create an opportunity for us to pick up vendors just pick up other companies. I'll give you a very interesting example, Pinjalim, I'm sure you noticed this, right? When cloud became really, really exciting, on-prem software company valuations came down, even though we know that on-prem software companies are -- have greater -- better gross margins and all that good stuff. And so from the kind of business we run, I think, we will find other companies that are really good companies in our industry, which are now less interesting to VCs who might say, you know what, the combination of capital being scarcer and there is some hot stuff going on with generative AI, let's put our money to work there. So I think that's a really astute observation, Pinjalim.

Got it. Thank you very much.

Thank you. One moment for our next question and that will come from the line of Brent Thill with Jefferies. Your line is open.

Thanks. I was curious if you could drive into the strength in the customer demand. You had mentioned strength, it sounded like it was no waiver in demand. Maybe if you could just unpack where you're seeing the strongest signals from your customers and excitement. And if I could also drill a little into MarkLogic. You mentioned that was a bit better. Can you remind us what revenue you recognized this quarter from MarkLogic and any other color that you can share? Thanks.

I will let Anthony come in on the MarkLogic part and share numbers around that. But I will -- I think overall in terms of demand, I mean, Brent, it's actually been a really wonderful to see, as I mentioned, across the board. Customers are looking to do things with products that they already know how to use, right? So that's one of the reasons why expansions are really sort of a big part of our business, whether it is a product like OpenEdge where customers are saying you know I'll give you an interesting example about an OpenEdge customer, right? And I won't name names because sometimes it's a bit challenging, but I'll give you the example anyway. The customer has spent the last five years thinking that they needed to find a different platform. They were sold by somebody saying, hey, if you use our platform you will be able to modernize and have an application that replaces the application you're currently using on top of OpenEdge with something so much better, nicer, shinier, greater, right? They spent let's just say north of $50 million over the last five years and they just decided that you know what enough is enough. The project is now -- the project still has a similar time line going forward. They have as many years to go as they did when they started, right? So they haven't made any progress in terms of trying to completion at this point which is bizarre, right? So anyway. So we basically, they recommitted to us, they expanded. They decided to modernize using OpenEdge. We shared with them what they could do with it. And they signed a seven-figure expansion deal with us. So I think, to me, that's part of the trend. People are saying,…

Yeah, sure. So we were right around $25 million for the quarter, Brent. And honestly, that was a bit ahead of our expectations. Maybe a few million dollars ahead to be honest. And there is a lot of seasonality in that business, we mentioned it on the last call. But we would probably expect Q2 and Q4 for this year to be the bigger quarters. I would expect Q3 to be seasonally a bit slower and so it might step down a few million bucks during the third quarter because of just seasonality. But overall we did come in a bit higher than expected both top line and bottom line on MarkLogic this quarter. So that was really encouraging.

Great. Thank you.

Thank you. One moment for our next question and that will come from the line of Anja Soderstrom with Sidoti. Your line is open.

Hi. Thank you for taking my question and congratulations on another great quarter and execution. You mentioned in a previous question that you expect expenses to creep up a bit due to inflation and wage inflation. Is there anything you can do to offset that?

So, thank you, Anja. We actually are looking to see like what we really can do. I mean I'll let Anthony talk about this more around expenses. But from our perspective, we continue to look for opportunities where we can control costs and reduce spend, but at the same time, there are some market factors that are really out of our control. Anthony, do you want to expand?

Yeah. No, I think that's right, Yogesh. And in past years, we have taken steps in other areas of the business where we could get a little bit leaner. Selling our corporate headquarters last year was a pretty good example where we took some assets off the balance sheet, put some capital on the balance sheet and took down our operating spend. There are smaller opportunities that we're pursuing now and I think it's just part of the Progress DNA where we're constantly doing that. So I think we have the ability to maintain and over the long run slightly improve our margins. We sort of talked about that a little bit during Investor Day. I think the inflation that we're seeing, wage inflation in particular is something that's been a bit stubborn for maybe the past two years. I think up to this point, we've done a good job offsetting it and I think we'll continue to do that. But it just takes -- it takes sort of a lot of work and we need to be scrappy as we work through the back half of the year. So I guess I would probably leave it at that. But, yeah, there are areas we can look into and I think that's been our history.

Okay. Great. Thank you. That's all for me.

Thank you. As I'm showing no further questions in the queue. At this time, I would like to turn the call back over to Mr. Yogesh Gupta for any closing remarks.

Well, thank you, everyone for joining us. Once again, we're excited about where we're going and our second half of the year as well in addition to what we have delivered in the first half. We look forward to talking to you again soon. Have a good night.

Thank you all for participating. This concludes today's program. You may now disconnect.